Property Prices in Portugal Still Falling

Data from the latest housing market survey from the Royal Institution of Chartered Surveyors and Confidencial Immobiliario shows rents and property prices in Portugal are still falling due to continued weak demand. This particular survey covers the Algarve, Lisbon and Porto and shows the weakness of residential property sales, although it is the first time it has revealed any signs of weakness in the residential rental sector.

The numbers of transactions and prices have fallen, as at 72% of those surveyed saw price falls rather than gains. The price falls are largely due a decline in demand rather than an increase in supply, as the number of new listings has fallen since December 2010 and there have been no significant building projects in recent years. This declining demand is expected to continue due to the high unemployment rates and a fall in mortgage lending. Unemployment in Portugal is currently at 16.3%.

However the survey did find that the demand for new build homes tended to be better than the demand for existing stock, as residential developers are seeing less severe price declines than residential estate agents. While some estate agents are still pessimistic about the outlook for this year, others feel that 2013 will be better due to an improvement in credit conditions.

Up until now the residential rental sector had benefited from the decline in property sales, but is now beginning to slow slightly. It had previously been boosted by the fact that more households had been forced to turn to rented accommodation due to constraints over mortgage lending. Demand from new tenants dropped slightly, and the number of new instructions from landlords stabilised.

 

Property Prices in Portugal Are Still Falling

Now could be the perfect time to buy property in Portugal as recent data shows prices fell by 8.9% to the year ending May 2012, but in the quarter ending May 2012 prices dropped by just 0.8%. Prices of apartments have fallen more quickly than houses, dropping by 10% over the past year compared to just 7.2%. It is predicted that prices will continue falling for the rest year, and that domestic demand will remain weak due to Portugal’s problems.

Although Portugal had to request a bailout, it has coped relatively well and has stuck to a tough austerity programme that has earned praise from onlookers. Unemployment is still high in the country, as it recently rose to reach a record 15%, which means 830,000 people are now unemployed compared with 440,000 at the end of 2008.

One of the hardest hit sectors is the construction industry as the number of construction firms going out of business has increased by nearly 50% during the past year, and it’s expected thousands will lose their homes due to foreclosure.

The construction industry is estimated to owe banks around €25 billion, and the banks are cutting back on loans, resulting in projects grinding to a halt. In spite of the problems in the country, home ownership is surprisingly high, as the government gave out generous mortgage subsidies that pushed owner occupancy rates up to a high of 75% in 2001. This led to the rental market shrinking to just 21% of total housing stock.

It’s relatively straightforward to buy property in Portugal and there are no restrictions on foreign ownership, while transaction costs are generally reasonable.

Buying a Property in Portugal: the Pros and Cons

Portugal is hardly a wallflower when it comes to the international financial crisis, in fact it is one of the most talkled about markets in the world, unfortunately for all the wrong reasons. The economy continues to contract, and despite the fact that the property market never had a boom, it has and is having one of the worst crashes in the history or capitalism and house sales.

During the year to end-May 2012, the average property price in the country plunged by 8.9% to €1,047 per square meter (sq. m.), based on the figures released by Statistics Portugal (INE). When adjusted for inflation, property prices actually dropped by 11.3% over the same period. But people are still buying holiday homes in Portugal, some purely as a lifestyle choice, but others as a investment to rent out when not in use. Here are the pros and cons of buying Portuguese property.

The Cons

Prices:

As you will see prices below, prices is in both the cons and the pros sections. This is because while falling prices makes for some seriously good bargains, it also makes the market very risky and uncertain, which is a big turn off for investors at the moment. Because of hyper-inflation and currency fluctuations, cash is devaluing, and when investors put money into property they usually want something that will hold its value and therefore keep their cash safer than cash.

The Mould

As in a mould that’s hard to break. Portugal not having had a boom may give us undervalued property and a strong banking system, but it is important not to forget the reasons why Portugal never had a boom. This is down to its sluggish economy for the decade going into the noughties, and the strict rental controls on the market, which all but make price growth illegal for the most part. With Portugal now stuck in austerity, it will find it even harder to break the pattern of sluggish growth.

The Pros:

Climate:

Asking about the climate of Portugal is a bit like asking about the color of the sand on the world’s beaches, it varies from place to place and time to time, and Portugal’s climate is the same. It varies considerably from one region to another and is influenced by the relief, latitude and proximity to the sea. Areas closer to the sea have the slighly cooler summers, but milder winters, with winters being paritcularly mild in the Algarve. Inland areas have the hottest summers, but slightly colder winters, although the winter temperatures are still mild compared to the rest of Europe.

In the Azores the weather is mild all year round because the climate is influenced by the islands’ latitude and by the Gulf Stream. The latter also affects the sea temperatures making the seas around Azores warm enough for nautical sports all year round. Likewise in Madeira, which has a very subtropicalesque climate, because of its geographical position and mountainous relief. Madeira’s climate is almost perfect with summer temperatures of around 26c and winter temperatures not dropping below 19c.

Prices:

As I said, Portugal never experienced a boom during the boom years, in fact, prices grew by jusy 9% between 2003 and 2007, which is a fall of 9% after inflation (in real terms). So, while property in the likes of the UK and Spain, where prices grew much faster property became very overvalued, and in the former remains overvalued to this day, but property in Portugal is comparatively undervalued. With prices still falling, undervalued is a strong term, but it is an accurate one; Portugal property is undervalued based on comparison to rental prices, and on comparison to other European countries, i.e. compare prices in Lisbon to the likes of Paris etc.

This makes for some fantastic bargains in Portugal, especially with prices still falling.

Finance Available:

No boom for Portugal has another plus now, there was no irresponsible lending and so the banking system never collapsed, and so the banks have continued to lend throughout the downturn. Foreigners can still get mortgages in Portugal, and while it’s not the 100% LTV desperation fest we are seeing in Spain, it s no more difficult to get a mortgage now, than it was before the crash.

Round Up:

As you can see, the cons are pretty much only going to put investors off buying property in Portugal, while the pros will pull in holiday home buyers. And that is probably about the size of it at the moment, holiday home buyers can get some good deals, but investors are probably gonna steer clear.